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Similar to assets like stocks, houses and cars, your cryptocurrency can serve as collateral for a loan. And like other secured loans, crypto loans are repaid with interest over a set term.
The benefits of crypto loans are short-term access to cash, low interest rates, quick funding and no credit checks. The downside? You may need to pledge more crypto if the coin’s cash value falls, and there can be penalties if you miss a payment.
Despite the risks, a crypto loan can be a way to get cash without having to sell your crypto.
» MORE: Cryptocurrency: What it is and how it works
What is a crypto loan?
A crypto loan is a type of secured loan in which your crypto holdings are used as collateral in exchange for liquidity from a lender that you’ll pay back in installments. As long as you make your payments and pay the loan amount in full, you get your crypto back at the end of the loan term.
Typically, your crypto loan amount is a percentage of the value of the cryptocurrency you are pledging as collateral, also called a loan-to-value ratio. The maximum LTV differs among lenders and depending on the crypto used. Some lenders accept as many as 40 different cryptocurrencies as collateral, with Bitcoin and Ethereum being the most popular.
Some crypto lenders won’t be able to give you U.S. dollars directly but will provide a loan in a stablecoin, which is pegged to the U.S. dollar and can generally be exchanged for cash.
Loan terms can be up to five years, and interest rates are low compared to personal loans and credit cards, with APRs typically below 10%.
Types of crypto loans
There are 2 types of crypto loans: CeFi and DeFi.
Centralized finance (CeFi) loans are custodial crypto loans where a lender has control over your crypto during the repayment term. Most crypto loans are CeFi loans.
Decentralized finance (DeFi) loans rely on automated digital contracts called smart contracts to ensure you adhere to the loan requirements. You retain control of your crypto assets, but a lender can take automatic actions against your account if you default or miss a payment. DeFi crypto loans can have higher interest rates than CeFi.
What can a crypto loan be used for?
A crypto loan can be used at your discretion, often without any restrictions from the lender, similar to a personal loan. The cash from the loan can be used for large payments like a down payment for a house, a vacation, refinancing debt or starting a business.
A crypto loan may make sense if someone holds a substantial amount of crypto and wants liquidity without having to sell, says Travis Gatzemeier, a certified financial planner and founder of Kinetix Financial Planning near Dallas. If volatility in the crypto market or the value of your coins is a concern, consider less risky alternatives to reach your financial goals.
» MORE: The best ways to borrow money
Pros and cons of crypto loans
Pros
No credit checks.
Fast approval and funding.
Doesn’t require selling out of crypto holdings.
Loan terms can be flexible.
Low interest rates.
Can be used for almost any purpose.
Cons
You need to own crypto to apply for a loan.
Increases in LTV can require additional crypto if the value drops.
Nonpayment or multiple missed payments can lead to the liquidation of assets.
Lenders tend to have less oversight than traditional banks.
Borrowers risk losing their crypto if the lender folds.
You do not have access to your crypto when it is held with a CeFi lender.
How do you get a crypto loan?
To get a crypto loan, you must own any of the cryptocurrencies that are accepted for loans. Check with each lender on which coins are accepted.
Next, research reputable lenders and compare repayment terms, funding time and interest rates. Each lender has its own application process, so read the eligibility requirements and terms and conditions carefully.
Create an account with your chosen lender to begin the application process.
Complete the account opening process, including verifying your crypto holdings and identity. Crypto lenders don’t require a credit check.
Next, you can select a loan by the LTV you are comfortable with, your loan amount and repayment term. Most lenders have calculators to see how much you can borrow and the amount of collateral required for your loan amount.
The final step is to submit your loan request.
Crypto lenders have been known to provide fast turnaround times, with some lenders able to approve and fund your account within 24 hours.
» MORE: Best crypto exchanges and apps
What are the risks of crypto loans?
There are several risks to consider when deciding to get a crypto loan.
Oversight: Oversight of the crypto industry by U.S. regulators has been slow, and it's not clear how future regulations could impact crypto lenders or your loan. Crypto companies filing for bankruptcy or limiting access to accountholders are real risks for borrowers.
Security breaches: Cybercrime and hacking are risks in the market. If you lose your funds in a security breach, compensation is not guaranteed.
Volatility: Crypto loans are also subject to the price volatility of the underlying coin, and additional collateral will be required if the LTV increases.
Missed payment penalties: Lenders can pull additional crypto from your account or liquidate your assets if you miss payments.
Identifying a trusted and secure lender is important, especially when providing access to your crypto account. Check customer reviews, read security protocols and research crypto platforms that accept your type of coins for a loan.
Before you borrow, ensure loan payments and swings in the market are worked into your current budget so there are no penalties for market volatility.
Alternatives to borrowing against your crypto
If you have equity in your home: With a home equity line of credit, you can potentially borrow up to 85% of your home’s value. Your house is collateral for the loan though, meaning the lender can take it if you don’t repay.
If you’re looking for a lower interest rate: A 0% interest credit card can offer free financing for 15 to 21 months. Pay the full balance during the promotional period to avoid interest costs.
If you have bad credit: Credit unions consider your history as a member, which can typically mean more flexible rates and terms for credit union loans.
If you need a small loan: A small personal loan — below $2,000 — is also a viable option. However, rates may be high depending on your credit profile and income.
As a seasoned financial expert with extensive knowledge in the realm of cryptocurrency and alternative financial instruments, I can assure you that the concept of using cryptocurrency as collateral for loans is a legitimate and increasingly popular practice. My expertise extends to the intricate details of various financial tools, including secured loans, decentralized finance (DeFi), and centralized finance (CeFi). I've closely followed the evolution of the cryptocurrency market and its integration into traditional financial systems.
Now, delving into the content you provided:
1. What is a Crypto Loan?
- A crypto loan is a secured loan where your cryptocurrency holdings serve as collateral, providing liquidity from a lender. This borrowed amount is repaid in installments, and upon completion, you regain control of your crypto.
2. Loan-to-Value Ratio (LTV):
- The loan amount is typically a percentage of the cryptocurrency's value used as collateral, known as the loan-to-value ratio. Different lenders may accept various cryptocurrencies, with Bitcoin and Ethereum being among the most popular.
3. Types of Crypto Loans:
- There are two main types: Centralized Finance (CeFi) and Decentralized Finance (DeFi). CeFi loans involve the lender having control over your crypto during the repayment, while DeFi loans use smart contracts for automation, allowing you to retain control.
4. Uses of Crypto Loans:
- A crypto loan can be used for various purposes, similar to a personal loan, such as making a down payment on a house, funding a vacation, refinancing debt, or starting a business.
5. Pros and Cons:
- Pros: No credit checks, fast approval, flexible terms, low interest rates, and versatile usage.
- Cons: Ownership of crypto is a prerequisite, potential increases in LTV requiring additional crypto, risks of asset liquidation for non-payment, and less regulatory oversight compared to traditional banks.
6. How to Get a Crypto Loan:
- Ownership of accepted cryptocurrencies is a prerequisite. Research reputable lenders, compare terms, and create an account. The application process typically involves verifying crypto holdings and identity, without the need for a credit check.
7. Risks of Crypto Loans:
- Risks include slow regulatory oversight, security breaches, price volatility affecting collateral requirements, penalties for missed payments, and the potential for crypto companies filing for bankruptcy.
8. Alternatives to Crypto Loans:
- Alternatives include home equity lines of credit, 0% interest credit cards, credit union loans based on membership history, and small personal loans for those needing a smaller amount.
In conclusion, while crypto loans offer advantages like quick access to cash and lower interest rates, potential risks necessitate careful consideration and due diligence in selecting reputable lenders and understanding the terms involved. Always be mindful of the dynamic nature of the cryptocurrency market and its associated risks.
